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AAT Level 3 Costs & Revenues

AAT Level 3 – Costs & Revenues Objectives: 1.Correctly explain what is meant by a budget. 2.Compare budget costs with actual costs, identifying variances. 3.Correctly identify when variances are significant. 4.Be able to suggest possible causes of variances. 5.Discuss the two different types of budgets (fixed and flexible). 6.Correctly calculate flexed budgets and analyse variances for management reports. 7.Prepare a full variance analysis using a fixed budget.

AAT Level 3 Costs & Revenues Fixed & Flexible Budgets & Variance Analysis

A financial plan.. that is prepared in advance Budget

Budget A financial plan.. that is prepared in advance Used to monitor costs and income Allows managers to control costs/income Cutting down on waste Eliminating unnecessary costs Changing suppliers Chasing debtors Why bother?

Adverse (Bad for business) What is a variance? Favourable (Good business) The difference between the comparative value and the actual value

Variance - The difference between the comparative value and the actual value Profit for the year 2013 averaged at £25,000 per week Profit for the year 2012 averaged at £55,000 per week Corresponding period Previous period Budget

Variances Adverse or Favourable? Adverse/Favourable results depend on the variance being considered BudgetActual Variance £120,000£125,000£5,000 Budget ActualVariance £120,000£125,000£5,000 Costs Income

Calculating Variances To calculate £ variance=A - B Where A = Actual figure B = Comparative figure (Budget, Previous, Corresponding)

Question 1: September Budget £ Actual £ Variance £ F or A Volume sold4000 units4200 units Sales revenue Less costs: Direct materials Direct labour Overheads31200 Operating profit F F A A 0

Question 2: October Budget £ Actual £ Variance £ Adv/ Fav Volume sold28000 units26000 units Sales revenue Less costs: Direct materials Direct labour Overheads Operating profit Answer

Question 2: October Budget £ Actual £ Variance £ Adv/ Fav Volume sold28000 units26000 units Sales revenue A Less costs: Direct materials A Direct labour F Overheads A Operating profit A

Variances – The Golden Rules To calculate £ variance=A - B To calculate the % variance =A – B X 100 B Where A = Actual figure B = Comparative figure (Budget, Previous, Corresponding) Remember!!! Never divide by the Actual figure!!!!! Hint: Identify & label your columns A & B first!!!

Tolerances An acceptable percentage variance from the comparative The business will only investigate variances outside the tolerance levels e.g. variances of 10% + Significant Not Significant

Budgets What may cause a variance?

Colman Toys Coleman Toys make traditional wooden toys for the overseas market.

Colman Toys Coleman Toys make traditional wooden toys for the overseas market. At the beginning of the year they estimated that their Direct Material costs would be £150,000 and their Direct Labour Costs £400,000.

Colman Toys Coleman Toys make traditional wooden toys for the overseas market. At the beginning of the year they estimated that their Direct Material costs would be £150,000 and their Direct Labour Costs £400,000. It is now year end and they have actually spent £180,000 on materials and £375,000 on labour.

Colman Toys Coleman Toys make traditional wooden toys for the overseas market. At the beginning of the year they estimated that their Direct Material costs would be £150,000 and their Direct Labour Costs £400,000. It is now year end and they have actually spent £180,000 on materials and £375,000 on labour. What may have caused these variances?

Causes of Variances Direct Materials Direct Labour Fixed Overheads Sales Revenue What factors may effect these costs?

Causes of Variances Direct Materials Direct Labour Fixed Overheads Sales Revenue Quality Wastage Cost Theft Specification change Pay rise Poor supervision Skill level Machines -Breakdown -Increase speed –Decrease speed Inflation Supplier change Stepped cost Price increase or decrease Volume sold

Causes of Variances Direct Materials Direct Labour Fixed Overheads Sales Revenue Quality Wastage Cost Theft Specification change Pay rise Poor supervision Skill level Machines -Breakdown -Increase speed –Decrease speed Inflation Supplier change Stepped cost Price increase or decrease Volume sold Solutions?

Budgets Fixed BudgetFlexible (Flexed) Budget ****Cost behaviours***

Question 3: September flexed budget Budget £ Flexed budget Actual £ Variance £ Volume sold4000 units 4200 units Sales revenue Less costs: Direct materials Direct labour Overheads31200 Operating profit I/D Fixed costs (Overheads) Selling price = /4000 = £40 Flexed = 4200 x £40 = Materials = 60000/4000 = £15 Flexed = 4200 x £15 = £ Labour = 32000/4000 = £8 Flexed = 4200 x £8 = £

Question 4: October flexed budget I/D Fixed costs (Overheads) Budget £ Flexed budget Actual £ Variance £ Volume sold28000 units units Sales revenue Less costs: Direct materials Direct labour Overheads Operating profit

Questions 5, 6 & 7

Question 8

Question 8a - Answer Total materials variance = Budgeted cost for actual output - actual cost (4 kg x £26 x 22200) = – = F Total direct labour variance = Budgeted labour cost for actual output – actual cost (2 hrs x £9.40 x 22200) = – = 3600 F Total fixed overhead variance = Fixed overheads budgeted – actual (21400 units x 2 x £9.40) = – = 3860 F

Question 8b

Variance Reconciliation Statement Fixed budget profit Variances: Sales volume (B Profit – F Profit) Selling price (A Sales – F Sales) Labour (A Labour – F Labour) Materials (A Materials – F Materials) Fixed costs Actual profit

Fixed budget profit105,000 Variances: Sales volume (B Profit – F Profit)105,000-95,000 =10,000 Selling price (A Sales – F Sales) Labour (A Labour – F Labour) Materials (A Materials – F Materials) Fixed costs Actual profit Variance Reconciliation Statement

Fixed budget profit105,000 Variances: Sales volume (B Profit – F Profit)105,000-95,000 =10,000 Selling price (A Sales – F Sales) Labour (A Labour – F Labour) Materials (A Materials – F Materials) Fixed costs Actual profit Variance Reconciliation Statement

Fixed budget profit105,000 Variances: Sales volume (B Profit – F Profit)105,000-95,000 =10,000 Selling price (A Sales – F Sales)266,500 – 260,000 =6,500 Labour (A Labour – F Labour) Materials (A Materials – F Materials) Fixed costs Actual profit Variance Reconciliation Statement

Fixed budget profit105,000 Variances: Sales volume (B Profit – F Profit)105,000-95,000 =10,000 Selling price (A Sales – F Sales)266,500 – 260,000 =6,500 Labour (A Labour – F Labour)78,000-78,000 =0 Materials (A Materials – F Materials) Fixed costs Actual profit Variance Reconciliation Statement

Fixed budget profit105,000 Variances: Sales volume (B Profit – F Profit)105,000-95,000 =10,000 Selling price (A Sales – F Sales)266,500 – 260,000 =6,500 Labour (A Labour – F Labour)78,000-78,000 =0 Materials (A Materials – F Materials) 58,500 – 52,000 =6,500 Fixed costs Actual profit Variance Reconciliation Statement

Fixed budget profit105,000 Variances: Sales volume (B Profit – F Profit)105,000-95,000 =10,000 Selling price (A Sales – F Sales)266,500 – 260,000 =6,500 Labour (A Labour – F Labour)78,000-78,000 =0 Materials (A Materials – F Materials) 58,500 – 52,000 =6,500 Fixed costs35,000 – 39,500 = 4,500 Actual profit Variance Reconciliation Statement

Fixed budget profit105,000 Variances: Sales volume (B Profit – F Profit)105,000-95,000 =10,000 A Selling price (A Sales – F Sales)266,500 – 260,000 =6,500 F Labour (A Labour – F Labour)78,000-78,000 =0 0 Materials (A Materials – F Materials) 58,500 – 52,000 =6,500 A Fixed costs35,000 – 39,500 = 4,500 A Actual profit Variance Reconciliation Statement

Fixed budget profit105,000 Variances: Sales volume (B Profit – F Profit)105,000-95,000 =10,000 A Selling price (A Sales – F Sales)266,500 – 260,000 =6,500 F Labour (A Labour – F Labour)78,000-78,000 =0 0 Materials (A Materials – F Materials) 58,500 – 52,000 =6,500 A Fixed costs35,000 – 39,500 = 4,500 A (14,500) Actual profit Variance Reconciliation Statement

Fixed budget profit105,000 Variances: Sales volume (B Profit – F Profit)105,000-95,000 =10,000 A Selling price (A Sales – F Sales)266,500 – 260,000 =6,500 F Labour (A Labour – F Labour)78,000-78,000 =0 0 Materials (A Materials – F Materials) 58,500 – 52,000 =6,500 A Fixed costs35,000 – 39,500 = 4,500 A (14,500) Actual profit90,500 Variance Reconciliation Statement

Question 9 – Green Ltd

Practice Questions Complete practice questions 10 – 18 in your Excel workbook. completed workbook to: